As Labour’s shadow Finance Minister David Parker pointed out on RNZ this morning, New Zealand has led the way internationally by making the control of inflation the sole focus of its central bank – with the dire result that when property prices go up in Auckland, the Reserve Bank feels obliged to raise interest rates and clobber families with mortgages and the export sector alike, across the entire country. For two decades now, we’ve learned to co-exist with the weird, self-inflicted damage from policy settings whereby the RB routinely feels impelled to reach for the interest rate lever even when – as now – there is no price inflation whatsoever within the productive part of the economy. Right now, the main side effect of simply relying on interest rate hikes to combat inflation has been to attract foreign speculators, and to kick up the exchange rate – to the further detriment of our exporters abroad, and families with mortgages at home.
Labour’s plan would widen the criteria that the RB should need to consider when it tackles inflation – a requirement entirely in line with the orthodoxy elsewhere. The US central bank for instance, has always and routinely needed to consider unemployment/unemployment factors when setting inflation rates, and yet somehow, this hasn’t stopped capitalism in its tracks. In the last 24 hours alone, the US Federal Reserve has been weighing those wider factors, and this requirement has lead to the kind of policy debate reported overnight in the Financial Times:
When considering labour markets, the Fed has historically raised interest rates when unemployment has dropped to levels below which it would expect a pick-up of inflation – the non-accelerating inflation rate of unemployment, which the Fed believes is about 5.5 per cent. At the average rate of payroll growth of about 200,000 jobs per month in this and prior US economic expansions, the Fed could anticipate reaching the 5.5 per cent unemployment rate in late 2015. This assumes that the percentage of the population working or seeking work, the labour force participation rate, remains unchanged.
This need for the US Fed to consider the impact on unemployment before hiking interest rates leads onwards to a useful policy debate ; as in how, for instance, does the Fed explain the downturn in labour force participation that has occurred during the current expansion? Maybe, some suggest, this reflects the depth of worker discouragement caused by the GFC ; maybe it also reflects the way essential skills have eroded or become obsolete, leaving such people structurally unemployable ? Either way, that debate leads to better policy outcomes. Here in New Zealand, the RB simply saws away on interest rates, and employment issues are not considered before crucial decisions are made.
The main dimension of Labour’s policy is to offer an alternative to the current reliance on interest rate hikes; mainly, by requiring higher contributions to Kiwisaver, as an inflation fighting tool.
We’re going to give the Reserve Bank another mechanism, which is a variable savings rate through KiwiSaver. The Reserve Bank will be able to keep its inflation anchor but instead of that money being lost to you in higher interest rates it will go into your savings. The benefit for the export sector is instead of jacking up interest rates and pushing up the exchange rate you will still control inflation but you’ll have lower interest rates and a better exchange rate.” Mr Parker said it would apply to working people but it would consider excluding those on the lowest incomes.
Right. Instead of paying higher interest rates to Aussie-owned banks and seeing those profits flow offshore, the Labour plan would channel those funds into domestic savings, and take a lot of the current speculator-driven pressure off the exchange rate. Even at the highest rates of Kiwisaver contributions envisaged by Labour, as Guyon Espiner pointed out on RNZ this morning, this would still be well below the level of compulsory superannuation contributions in Australia.
Incidentally, the politics of this debate do have extremely odd elements to them. It is Labour, the nominally centre-left party, that is coming to the rescue of those export businesses that are being clobbered by the exchange rate – at a time when National, the alleged friend of business, is telling those firms to suck it up, and learn better survival tactics. Furthermore, it is National that is crying crocodile tears over the plight of those on low incomes. Finance Minister Bill English for instance, has warned of what he calls the “toxic” outcomes of Labour’s policy, whereby those on lower incomes [i.e. the majority of New Zealanders] would face the tandem impact of higher compulsory Kiwisaver contributions and more expensive imports, if and when the Labour plan succeeded in dropping the exchange rate.
English’s comments were a reminder of what has been a largely hidden dimension of this year’s election strategising. Clearly, a high exchange rate serves the political interests of the Key government, by protecting it from the immediate fallout from a lower exchange rate: which would include, for example, higher petrol prices at the pump, and higher prices for consumables. Most voters are consumers, not exporters – and thus, keeping the dollar aloft serves as a form of Muldoonist economic populism that John Key and Bill English seem very happy to embrace. Cheaper imports underpin spending in the local economy. (On the side, it also makes the imported component of our exports that much cheaper.)
So far, so good, so unsustainable. In a modern economy, no country can afford to put the interests of consumers ahead of its exporters, long term. At 85 cents to the US dollar, the pain currently being inflicted on our exporters is such that it exceeds any gains in efficiency they’ve been forced to make in order to survive. Sooner or later, the government is going to have to look beyond its own short term political interests, and start to govern in the interests of the country. For now – and just as it has done with respect to the age of superannuation entitlement – Labour is playing the role of the unwelcome guest that has to remind voters that the current policy settings cannot endure. In the old fable, the grasshoppers were more popular – but the ants had the better strategies for survival.